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Cat bond returns up year-on-year to 31st March: Aon Securities


Annual returns for catastrophe bonds rose in the year to 31st March 2017, as evidenced by all of Aon Securities insurance-linked securities (ILS) indices reporting higher performance year-on-year.

The rise in catastrophe bond investment returns has partially been driven by a shift in 2016 towards higher coupons, as can be seen in Artemis’ chart showing the average coupons of issued cat bonds across each year, which has helped many cat bond funds performance over the last 12 to 18 months.

This shift is one factor that has helped to drive returns for the Aon ILS Indices higher, with all four of the indices tracked by the insurance and reinsurance brokers capital markets unit Aon Securities reporting a year-on-year increase in returns, details in the chart below.

Aon ILS Indices annual performance

Aon ILS Indices annual performance

Aon Securities noted that the annual returns for all of the Aon ILS Indices outperformed the prior year’s performance, they also beat a number of the fixed income benchmarks, although fell far behind the S&P500 for the year.

Driving the improvement in returns was the effect of tightening spreads in the secondary market throughout the year under review and the absence of a major catastrophe, Aon Securities said.

Impressively, despite the reduction in catastrophe bond returns over the last five years, the 10-year average annual return of the Aon All Bond Index stood at 7.70%.

Aon Securities said that this “Continued the trend of outperforming comparable benchmarks and reinforces the value of a diversified book of pure insurance risks for investors’ portfolios over the long term.”

In the first-quarter of 2017 things went the other way, with only the U.S. Earthquake bond index posting a gain over the previous year’s quarter.

Aon ILS Indices Q1 performance

Aon ILS Indices Q1 performance

Secondary market forces likely depressed the returns a little in the first-quarter of the year, resulting in mixed performance versus the benchmarks.

But Aon Securities noted that they “Did outperform the 3 to 5 year US Treasury Notes Index and the CMBS 3-5 Year, Fixed Rate Index.”

The first quarter is typically a slow one for cat bond returns but Q1 2017 does seem particularly slow, as measured by these indices. Returns did improve in April, we understand and with the U.S. hurricane season approaching the performance of cat bond indices should rise in Q2.

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